How small business owners can avoid a holiday financing hangover

By Odysseas Papadimitriou

It’s not all work for small business owners during the holiday season. Sure, things might be awfully busy this time of the year, especially if you run a retail company, but you’re going to be spending some time on the other side of the register as well.

Papadimitriou strongly advises against making holiday shopping purchases with your business credit cards.
(David Goldman - AP)
There are presents to buy and errands to run, and that necessitates adding a little strategy to your spending in order to minimize costs and avoid having to spend the first few months of 2013 pulling extra hours.

Numerous surveys have shown that the average holiday shopper is spending somewhere in the neighborhood of $800 on gifts this year. That, coupled with the fact that people historically rack up most of their credit card debt during the fourth quarter of the year, indicates that financing is in high demand. As such, there are a couple of things you need to keep in mind as you cross items off the old to-do list.

Financing for small business owners to avoid

First of all, you shouldn’t finance holiday shopping with a business credit card. Business credit cards aren’t covered by the CARD Act of 2009, which means issuers don’t have to wait until you’re 60 days delinquent to raise the interest rate on an existing balance. They can do so at any time, for any reason. You therefore have no debt stability unless your card is from an issuer like Bank of America that has proactively extended consumer protections to its business products. That’s why it’s best to use your personal card for holiday spending.

You shouldn’t use just any personal credit card, though. Many co-branded retailer credit cards offer 0 percent introductory interest rates, but a lot of them are part of deferred interest payment plans. In other words, the issuer will retroactively assess finance charges to the original purchase amount if you don’t pay off your full balance by the time regular rates take effect. Such misleading financing arrangements could augment your total costs by hundreds or even thousands of percent and completely blindside you as a result of minor payment issues.

For example, let’s say you drop $1,500 on holiday-related expenses using a card with deferred interest. It offers 0 percent for 10 months, at which point a 20 percent rate takes effect. You don’t foresee having any problem paying off that balance in time, but you experience some car trouble and are able to allocate only $1,000 to holiday debt during the initial 10 months.

Instead of incurring $6 in interest during the two additional months it takes to become debt free, as would be the case with a normal credit card, you’re hit with $169 in finance charges as a result of your original balance effectively accruing interest at a 20 percent rate for 12 months. That’s $163, or over 2,716 percent, more than you had planned and believed for months that you would spend.

So, which major retailers offer such confusing and risky financing plans? According to a recent Card Hub study, more than 60 percent of the retailers that provide financing offer deferred interest. The list includes holiday favorites like Best Buy, Toys R Us, Walmart, Apple, Victoria’s Secret, and The Sport’s Authority as well as business-oriented retailers such as OfficeMax and Office Depot. It’s therefore best to avoid retailer-specific financing this holiday season, especially since there are decidedly better deals available.

So what’s the alternative?

Traditional 0 percent credit card offers – those that apply regular rates only to the balance remaining at the intro term’s conclusion – are perhaps more attractive than they’ve ever been. Out there in the market right now, some deals are offering 0 percent on new transactions for up to 18 months, while others provide a free balance transfer — either of which could save you hundreds of dollars.

But strategically selecting financing isn’t the only way small business owners can save on their holiday expenses in 2012, whether they happen to be personal or professional in nature. You can also:

• Save on gift cards: Gift cards have long been the most requested holiday presents, and while you might assume there’s little wiggle room in their price, you can actually save up to 80 percent when making your purchases through an online gift card exchange. Billions of dollars in gift cards go unused each year, and a lot of people turn to the Web to sell those they don’t want. You could also do the same to score a bit of extra spending money.

• Subsidize with an initial bonus: In addition to attractive 0 percent deals, credit card issuers are also offering rewards bonuses to new customers who sign up for certain credit cards. One example is the Sapphire Preferred from Chase, which gives you a $400 statement credit for spending at least $3,000 in the first three months.

Hopefully these money-saving tips will help bring holiday cheer to those of you experiencing a bit of seasonal depression related to how much you foresee spending in the coming weeks.

Odysseas Papadimitriou is chief executive of Washington-based CardHub.com, a credit card comparison website, as well as the personal finance social network Wallet Hub.

Comments our editors find particularly useful or relevant are displayed in Top Comments, as are comments by users with these badges: . Replies to those posts appear here, as well as posts by staff writers.

To pause and restart automatic updates, click "Live" or "Paused". If paused, you'll be notified of the number of additional comments that have come in.

Comments our editors find particularly useful or relevant are displayed in Top Comments, as are comments by users with these badges: . Replies to those posts appear here, as well as posts by staff writers.